Brokers Renew Enthusiasm For CSL

This story features CSL LIMITED. For more info SHARE ANALYSIS: CSL

-High margin products in train
-May dominate market with Idelvion
-Significant cardio opportunity
 

By Eva Brocklehurst

CSL ((CSL)) has provoked renewed attention from brokers after it updated on a swag of new products it hopes to bring to market in the next year or so. Several key developments are now nearing commercialisation, including long acting haemophilia therapies.

UBS expects these products will contribute modestly at the revenue level but provide higher earnings, given margins are over 80%. The company's specialty products are such that more raw plasma does not need to be collected and base-fractionated, as is the case for immunoglobulin and albumin. Hence, margins are very high.

UBS believes the expenditure on research & development outlined at the briefing is a renewed commitment to sustaining the current growth profile and supports the stock's premium valuation.

Of note is Idelvion, a long-acting recombinant haemophilia treatment which has the potential to elevate the company to a new stage of growth. Macquarie is excited by this one, as it has a clear advantage against other next generation products in terms of both outcomes and dosing. The broker expects CSL will become the dominant player in this market and this could incrementally add 10% to earnings.

JP Morgan describes Idelvion as a potential “category killer” in a US$1.3bn market as it provides protection for 14 days. Approval in both the US and Europe is expected in 2016. The broker is encouraged by the progress over the last 12 months and expects a return to growth in FY17 on the back of products being launched over the next 18 months.

Afstyla is another haemophilia product to be launched next year. This market segment is considerably larger than that for Idelvion but it is more competitive and new products carry less differentiation, Macquarie observes. Still, the latest data is positive as it shows the improved efficacy of Afstyla. The broker suspects the company will replace all Helixate sales with Afstyla in coming years, which could boost earnings by 7.0%.

Macquarie is positive on the company's development strategy in the specialty portfolio, given the high incremental margins and probability of success.

An investment in CSL is also a free option, in JP Morgan's view, over an extraordinary but yet to be quantified opportunity in the cardiovascular arena, via rHDL. Enthusiasm for a drug in this category, CSL112, has arisen from data which demonstrates potential to reduce the risk of recurrent cardiovascular events. JP Morgan suspects this product could see a near doubling of R&D as the company contemplates a phase 3 trial.

Credit Suisse also notes the significant opportunity that exists for the company in the hereditary angioedema and cardiovascular markets, highlighting the phase 2b trial for CSL112 is due at the end of 2016.

The broker upgrades earnings estimates by 3.0%, which is driven by price increase for the company's Hizentra and specialty products in the US, partly offset by adverse FX movements.

Commentary on market conditions was very positive, in Deutsche Bank's view, with the company reporting all production of immunoglobulin and albumin is being sold.

The broker also notes the progress with CSL112 but observes, while this is a substantial opportunity, the company's plans to fully fund the development, along with a 10,000 patient phase 3 trial, are likely to cost in the realm of hundreds of millions of dollars.

Morgan Stanley stands out as the more sceptical, retaining an Underweight rating and $80.87 target on the stock. The importance of bringing the R&D pipeline to fruition cannot be underestimated, in the broker's opinion, and is critical to the long-term sustainability of current returns.

The broker acknowledges CSL's potential to be a first mover in the European market with Idelvion, but Afstyla may be affected by its tardiness in coming to market. Moreover, US pricing may indicate a price premium to incumbents but European pricing is not necessarily the case, Morgan Stanley suggests.

Morgan Stanley's valuation reflects the potential for accretive cash flow in the longer term from the Novartis flu acquisition. Still, the broker believes immunoglobulin industry growth is moderating and the coagulation franchise contracting. This is offset only somewhat by the robust growth in specialty products, in Morgan Stanley's opinion.

The partnering on CSL362 – for acute myeloid leukaemia – with Janssen is progressing and Janssen is now responsible for all further oncology development. CSL is expected to obtain milestone payments as a result but timing and quantum were not disclosed at this briefing.

The main disappointments brokers observe are with the delay of the launch of factor VIIa in haemophilia, which has moved out to 2020 because of manufacturing challenges, and a return to the clinic for the recombinant von Willebrand therapy.

FNArena's database shows six Buy ratings, one Hold and one Sell (Morgan Stanley) for CSL. The consensus target is $101.10, suggesting 1.2% upside to the last share price. Targets range from $80.87 (Morgan Stanley) to $110.00 (Macquarie).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms